1967 Letter to Stockholders

The 1967 letter marks a pivotal shift in Berkshire Hathaway's history: the first major step away from being purely a textile company.

Historical Stats

Accounting Period: 15 months ended December 30, 1967 (shifted from fiscal year ending Sept 30 to calendar year end).
Textile Sales: $39.0 Million (down from $49.4M in 1966).
Production Cutback: 15% (textiles, to avoid building inventories).
King Philip D Division pre-tax termination loss limit: $1.0 Million.
Insurance Acquisition Date: March 1967.
Insurance Management: Jack Ringwalt.

🚀 Landmark Acquisition: National Indemnity Company

In March 1967, Berkshire acquired National Indemnity Company and National Fire and Marine Insurance Company.

Manager: Led by Jack Ringwalt.
Strategic Value: This acquisition provided a diversified base of earning power. Notably, the insurance earnings in the first partial year already exceeded those of the larger textile investment.
Policy: Ringwalt’s principle of "underwriting for a profit" is highlighted as a key factor in the company’s success.
Capital: All earnings of the insurance subsidiaries are being retained to build additional capital strength.

🧵 Textile Operations

Challenges: Yardage demand and prices dropped sharply, and prices fell in all areas except the Home Fabrics Division. High training costs were incurred before returning to full capacity due to loss of skilled labor.
Closures: The King Philip D division in Warren, Rhode Island was closed due to the displacement of cotton lawns by polyester blends.
Transition: Berkshire fully utilized its operating loss carryforwards and became a taxpayer.

💰 1967 Shareholder Letter: The Birth of the Insurance Float Engine

"Our investment in the insurance companies reflects a first major step in our efforts to achieve a more diversified base of earning power." — Warren Buffett, 1967 Letter

🎭 The Narrative Context

The year 1967 is the genesis of modern Berkshire Hathaway. Confronted with a secular decline in textiles—where polyester blends were permanently displacing cotton lawn fabrics—Buffett made the decision to stop reinvesting in the mills. Instead, he directed Berkshire to acquire National Indemnity Company and National Fire and Marine Insurance Company for $8.6 million. This was not just a diversification move; it was the acquisition of an insurance float engine. In its first partial year, National Indemnity generated more profit than Berkshire's entire textile operation, despite representing a smaller capital investment. This letter documents the exact moment Buffett discovered the power of costless float, initiating the pivot that would redefine corporate history.

💡 Philosophical Gems

The Philosophy: The Discovery of Insurance Float

Buffett realizes that the core value of an insurance company is not just underwriting profit, but the temporary custody of other people's money.

The Logic: In insurance, customers pay premiums upfront, and claims are settled years later. This creates a large pool of cash—the "float"—that the insurance company can invest for its own benefit. As long as underwriting breaks even, this capital is effectively an interest-free loan with no covenants.
The Outcome: Under Jack Ringwalt, National Indemnity underwrote with a strict focus on profitability, ensuring that Berkshire's float carried a cost of less than zero.
The Quote: "Underwriting was conducted at a good profit margin and investment income increased substantially... All earnings of the insurance subsidiaries are being retained to build additional capital strength."

The Strategy: The Inutility of Sunk Costs (The Closing of King Philip D)

Buffett demonstrates the discipline to shut down efficient plants when the underlying economics of their market permanently deteriorate.

The Mechanism: The King Philip D division was a highly efficient plant for manufacturing cotton lawns. However, consumer demand had structurally shifted to polyester blends. Instead of trying to refit the mill at a massive cost, Buffett shut it down, accepting a $1 million loss.
The Lesson: Do not throw good money after bad. Plant efficiency is irrelevant if there is no demand for the end product.
The Quote: "The plant was an efficient one for the manufacture of fine combed lawns, which, unfortunately, are no longer in any sort of demand... conversion attempt [was] uneconomical."

The Discipline: Capital Flexibility and Leverage

Buffett outlines a new corporate mandate: capital must flow to its highest-return opportunity, regardless of industry boundaries.

The Mechanism: Buffett states that Berkshire's marketable securities are temporary parking spots for cash, ready to be deployed into operating acquisitions. Furthermore, he declares that Berkshire will not hesitate to borrow money to fund attractive opportunities.
The Shift: The corporate goal is no longer to run a textile company, but to obtain a stable and substantial level of earning power commensurate with employed capital.
The Quote: "We feel it is essential that we not repeat the history of the 1956-1966 period, when over-all earnings on average invested capital of over $30 million were something less than zero."

🗣️ Verbatim Masterclass

"Our investment in the insurance companies reflects a first major step in our efforts to achieve a more diversified base of earning power."
"We expect that there will be years in the future when the order of relative profitability is reversed... However, we believe it is an added factor of strength to have these two unrelated sources of earnings."
"We will not hesitate to borrow money to take advantage of attractive opportunities."

🔗 Evolutionary Links

Entities: National Indemnity Company, Jack Ringwalt, Berkshire Hathaway Inc.
Concepts: Insurance Float, Capital Allocation, Sunk Cost Fallacy, Diversification, Underwriting Profit

[!TIP] 1967 is the structural blueprint for Berkshire's compounding machine. When a commodity business faces secular decline, the rational response is to harvest its cash and redirect it into businesses with structural moats and float generation, rather than defending legacy operations out of sentiment.

Preceded by: 1966 Letter
Followed by: 1968 Letter
Index: index